Mismanagement of 401(k) Plan—Standard of Fiduciary Duty


The Fourth Circuit Court of Appeals recently reversed a district court decision and held corporate fiduciaries liable for losses to 401(k) plan. Employment lawyer Paul Mollica comments on the case, which was a subject of his blog posting “Tatum v. RJR Investment Committee, No. 13-1360 (4th Cir. Aug. 4, 2014).”

Paul Mollica

Paul Mollica

Mollica notes that 401(k) plans in the U.S. hold some $4 trillion in assets, affecting the potential retirement funds of most Americans. So the fiduciaries who manage these plans are trusted to manage these funds as if they were managing their own money.

In this case, RJR (the entity formed when R.J. Reynolds tobacco bought Nabisco) was in the process of spinning off the tobacco part of the entity. The plan managers decided to wind up the plan, freeze it, and then sell off the tobacco shares. The decision was the result of only thirty minutes of deliberation. The problem was that the shares were sold when the shares were at their lowest value, so the plan lost a great deal of money. Those who had shares in the Nabisco fund were hurt by this decision.

One of the big questions became the nature of the fiduciaries’ burden at trial. The trial judge held that they only had to prove that “prudent fiduciary under the same circumstances could have decided” to freeze the plan. But the Fourth Circuit disagreed, holding that the standard was that a prudent fiduciary “would have” made the same decision, Mollica explains. The case was sent back to the district for further consideration in light of the appellate court’s ruling.

The decision of the Fourth Circuit puts the burden of proof on the defendants in this case.

Paul W. Mollica joined Outten & Golden LLP as Of Counsel in 2010. He is a frequent author and lecturer (for lawyers and courts) in the area of employment discrimination. He is a two-term past president of the Chicago Council of Lawyers, a public-interest bar association. He has been selected as a Super Lawyer© in Illinois and has the highest, AV© rating from Martindale-Hubbell. He is licensed to practice in Illinois and New York. The Legal Broadcast Network is a featured network of the Sequence Media Group.